On January 1, 2012, Bartell Company sold its idle plant facility to Cooper Inc. for $1,050000. On this date, the plant had a depreciated cost of $735,000. Cooper paid $150,000 cash on January 1, 2012, and signed a $900,000 note bearing interest at 10%. The note was payable in three annual installments of $300,000 beginning January 1, 2013. Bartell appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 1, 2013, of $390,000, which included interest of $90,000 to date of payment. At December 31, 2013, Bartell had deferred gross profit of:
I know the answer is 180,000. At first I was under the impression it was because the company was making 90,000 interest gross profit time 2 to make it equal 180,000, but that does not seem correct. Any guidance would be greatly appreciated.
To calculate the deferred gross profit, we need to understand how the installment method works.
Under the installment method, revenue recognition is deferred until cash collections are received over multiple periods. This is typically done for sales that involve a long-term payment plan.
Let's break down the information provided:
1. Sale of the idle plant facility:
- Selling price: $1,050,000
- Depreciated cost of the plant: $735,000
2. Payment terms:
- On January 1, 2012, Cooper paid $150,000 in cash.
- The remaining $900,000 was treated as a note payable, bearing interest at 10% and payable in three annual installments of $300,000 each, starting from January 1, 2013.
3. First installment:
- On January 1, 2013, Cooper made a payment of $390,000, which included $90,000 of interest up to that date.
To calculate the deferred gross profit, we need to determine the gross profit on the sale of the plant and subtract the gross profit recognized as of December 31, 2013.
1. Gross profit on the sale of the plant:
Gross profit = Selling price - Depreciated cost
Gross profit = $1,050,000 - $735,000
Gross profit = $315,000
2. Gross profit recognized as of January 1, 2013:
The payment of $390,000 made on January 1, 2013, includes interest of $90,000. The remaining $300,000 is considered a reduction of the note payable.
3. Gross profit recognized as of December 31, 2013:
The gross profit recognized as of January 1, 2013 was $300,000. Since this amount was recognized in the first year, there is no additional gross profit recognized in the subsequent year.
Therefore, the deferred gross profit as of December 31, 2013, is equal to the gross profit on the sale of $315,000 minus the gross profit recognized as of January 1, 2013, which is $300,000.
Deferred gross profit = $315,000 - $300,000
Deferred gross profit = $15,000
Hence, the correct answer is $15,000, not $180,000.